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| FSTR > SEC Filings for FSTR > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
L. B. Foster Company is a leading manufacturer, fabricator and distributor of products for rail, construction, utility and energy markets. The Company is comprised of three business segments: Rail products, Construction products and Tubular products.
Recent Developments
In May 2009, we completed the formation of a joint venture with L B Industries, Inc. which requires us to contribute $1.9 million in total to the joint venture. We have a 45% ownership interest in the new joint venture, LB Pipe & Coupling Products, LLC, and made capital contributions of $0.7 million in the second quarter and $0.6 million in the third quarter. These contributions comprise our total initial capital contribution of $0.9 million and part of our required additional capital contributions of $1.0 million pursuant to the amended joint venture agreement.
During the third quarter of 2009, we purchased land and commenced the construction of a facility related to this joint venture. Upon completion of the construction, we plan to lease the facility to the joint venture. This venture will install equipment to manufacture, market and sell various products for the energy, utility and construction markets. This investment will be accounted for under the equity method of accounting as we have the ability to exert significant influence, but not control, over operating and financial policies.
In July 2009, we sold a portion of our investments in available-for-sale marketable securities for approximately $2.1 million in proceeds and recorded a corresponding gain of approximately $1.2 million. Our current investments in these securities have a fair value of approximately $1.7 million at September 30, 2009.
In September 2009, we implemented cost reduction measures in addition to those implemented in January 2009 which included further plant personnel reductions as well as a reduction in our salaried workforce in an effort to right-size the Company given our current volumes and profitability.
Also during the 2009 third quarter, we recorded approximately $0.4 million of slow moving inventory reserves in each of our Rail Products and Tubular Products Segments due to low activity levels.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company's specific circumstances. Application of these accounting principles requires management to make estimates about the future resolution of existing uncertainties. As a result, actual results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality. There have been no material changes in the Company's critical accounting policies or estimates since December 31, 2008. For more information regarding the Company's critical accounting policies, please see the Management's Discussion & Analysis of Financial Condition and Results of Operations in Form 10-K for the year ended December 31, 2008.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162." This statement modifies the GAAP hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB ASC is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. The codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. This statement applies beginning in the 2009 third quarter. All accounting references have been updated and, therefore, SFAS references have been replaced with ASC references.
The Company adopted changes issued by the FASB to accounting for business combinations beginning on January 1, 2009. FASB ASC Topic 805, "Business Combinations," retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. Topic 805 is effective for business combinations for which the acquisition date is on or after the beginning of the first fiscal year beginning after December 15, 2008.
The Company adopted changes issued by the FASB to accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued, otherwise known as subsequent events, on June 30, 2009. FASB ASC Topic 855, "Subsequent Events," requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.
In June 2009, the FASB issued changes to the consolidation guidance applicable to a variable interest entity (VIE). FASB ASC Topic 810, "Consolidation," amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity's economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Previously, FIN 46R required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. Qualifying special-purpose entities, which were previously exempt from the application of this standard, will be subject to the provisions of this standard when it becomes effective. FASB ASC 810 also requires enhanced disclosures about an enterprise's involvement with a VIE. Topic 810 is effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009.
Quarterly Results of Operations
Three Months Ended Percent of Total Net Revenues Percent Increase
September 30, Three Months Ended September 30, /(Decrease)
2009 2008 2009 2008 2009 vs. 2008
(Dollars in thousands)
Net Sales:
Rail Products $ 41,211 $ 65,646 44.6 % 45.1 % (37.2 ) %
Construction Products 48,072 69,769 52.0 47.9 (31.1 )
Tubular Products 3,130 10,135 3.4 7.0 (69.1 )
Total Net Sales $ 92,413 $ 145,550 100.0 % 100.0 % (36.5 ) %
Three Months Ended Gross Profit Percentage Percent Increase
September 30, Three Months Ended September 30, /(Decrease)
2009 2008 2009 2008 2009 vs. 2008
(Dollars in thousands)
Gross Profit:
Rail Products $ 5,148 $ 10,232 12.5 % 15.6 % (49.7 ) %
Construction Products 8,927 15,109 18.6 21.7 (40.9 )
Tubular Products (634 ) 2,908 (20.3 ) 28.7 (121.8 )
LIFO Credit (Expense) 4,918 (5,065 ) 5.3 (3.5 ) **
Other (601 ) (477 ) (0.7 ) (0.3 ) 26.0
Total Gross Profit $ 17,758 $ 22,707 19.2 % 15.6 % (21.8 ) %
Three Months Ended Percent of Total Net Revenues Percent Increase
September 30, Three Months Ended September 30, /(Decrease)
2009 2008 2009 2008 2009 vs. 2008
(Dollars in thousands)
Expenses:
Selling and
Administrative
Expenses $ 9,068 $ 10,092 9.8 % 6.9 % (10.1 ) %
Interest Expense 328 500 0.4 0.3 (34.4 )
Gain on Sale of
Marketable Securities (1,194 ) - (1.3 ) - **
Interest Income (169 ) (617 ) (0.2 ) (0.4 ) (72.6 )
Other (Income)
Expense (116 ) 48 (0.1 ) - (341.7 )
Total Expenses 7,917 10,023 8.6 6.9 (21.0 )
Income Before Income Taxes 9,841 12,684 10.6 8.7 (22.4 )
Income Tax Expense 3,697 4,558 4.0 3.1 (18.9 )
Net Income $ 6,144 $ 8,126 6.6 % 5.6 % (24.4 ) %
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Results of calculation are not meaningful for ** presentation purposes.
Third Quarter 2009 Compared to Third Quarter 2008 - Company Analysis
Net income for the third quarter of 2009 was $0.60 per diluted share compared to net income per diluted share of $1.15 for the third quarter of 2008.
Our gross profit margin includes a favorable impact of the LIFO method of accounting for inventory as of September 30, 2009 due principally to declining steel prices. The prior year period included a negative impact caused by inflation. Partially offsetting this favorable adjustment, were $3.9 million of unfavorable adjustments related to declining inventory pricing. Additionally, gross profit was adversely affected by approximately $1.0 million in charges related to slow moving and obsolete inventory, primarily occurring within our Rail Products and Tubular Products Segments. Increased unabsorbed plant costs of approximately $0.8 million over the prior year quarter resulting from low production volumes has also negatively impacted our gross profit margin.
The 2009 third quarter decrease in Selling and Administrative expenses primarily resulted from reduced incentive compensation expense, bad debt expense and travel and entertainment expenses. Lower interest rates resulted in reduced interest income earned on our various cash and cash equivalent instruments during the third quarter of 2009. Our 2009 third quarter also includes the previously mentioned gain of $1.2 million from the sales of marketable securities. Income taxes in the current quarter were recorded at approximately 37.6%, compared to the prior year period rate of 35.9% due to a reduced benefit from non-taxable interest income and certain domestic manufacturing credits.
Results of Operations - Segment Analysis
Rail Products
Three Months Ended Percent
September 30, Increase/(Decrease) Increase/(Decrease)
2009 2008 2009 vs. 2008 2009 vs. 2008
(Dollars in thousands)
Net Sales $ 41,211 $ 65,646 $ (24,435 ) (37.2 ) %
Gross Profit $ 5,148 $ 10,232 $ (5,084 ) (49.7 ) %
Gross Profit Percentage 12.5 % 15.6 % (3.1 ) % (19.9 ) %
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Third Quarter 2009 Compared to Third Quarter 2008
Our rail distribution business reported reduced sales which led the overall decline within the segment. This decrease was associated with reductions in sales volumes and lower steel prices. Another cause of the segment's sales decline was related to our transit products division. While new orders have increased, many of these orders have delivery dates in 2010 and beyond. Our concrete tie business reported lower sales attributable primarily to reduced sales at our Spokane, WA tie facility.
Falling steel prices and unfavorable plant variances associated with low activity levels have negatively impacted our Rail Products Segment gross profit. Specifically, steadily decreasing rail inventory values have negatively impacted our new and used rail distribution business. Market related volume reductions and a less favorable product mix have hampered our transit products division. Finally, our concrete tie division was negatively impacted by a charge of approximately $0.4 million related to slow-moving finished goods inventory.
Construction Products
Three Months Ended Percent
September 30, Increase/(Decrease) Increase/(Decrease)
2009 2008 2009 vs. 2008 2009 vs. 2008
(Dollars in thousands)
Net Sales $ 48,072 $ 69,769 $ (21,697 ) (31.1 ) %
Gross Profit $ 8,927 $ 15,109 $ (6,182 ) (40.9 ) %
Gross Profit Percentage 18.6 % 21.7 % (3.1 ) % (14.2 ) %
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Third Quarter 2009 Compared to Third Quarter 2008
Our Construction Products sales decline was due to decreased sales of piling products caused by reduced sales volume as well as to lower prices. The remaining divisions within this segment have experienced sales growth. The improvement in our fabricated products and concrete buildings divisions were, in part, based on activity related to the federal stimulus legislation.
The driver of Construction Products' gross profit decline was our piling division which, in addition to the impact of volume declines, experienced margin compression due to falling prices and decreased market demand for certain products.
Tubular Products
Three Months Ended Percent
September 30, Increase/(Decrease) Increase/(Decrease)
2009 2008 2009 vs. 2008 2009 vs. 2008
(Dollars in thousands)
Net Sales $ 3,130 $ 10,135 $ (7,005 ) (69.1 ) %
Gross Profit $ (634 ) $ 2,908 $ (3,542 ) (121.8 ) %
Gross Profit Percentage -20.3 % 28.7 % (48.9 ) % (170.6 ) %
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Third Quarter 2009 Compared to Third Quarter 2008
An industry wide slow down in the energy markets served by our Tubular Products segment has resulted in reductions in both our sales volumes as well as profitability.
Reductions in pipe pricing and unfavorable manufacturing variances have had significant, adverse affects on the gross profit margins of both Tubular Products divisions. Additionally, due to the slow down in market conditions, we recorded a charge of approximately $0.4 million related to slow-moving inventory in the current quarter.
Year-to-date Results of Operations
Nine Months Ended Percent of Total Net Revenues Percent Increase
September 30, Nine Months Ended September 30, /(Decrease)
2009 2008 2009 2008 2009 vs. 2008
(Dollars in thousands)
Net Sales:
Rail Products $ 139,866 $ 172,680 49.3 % 46.8 % (19.0 ) %
Construction Products 128,632 169,794 45.3 46.0 (24.2 )
Tubular Products 15,430 26,350 5.4 7.1 (41.4 )
Total Net Sales $ 283,928 $ 368,824 100.0 % 100.0 % (23.0 ) %
Nine Months Ended Gross Profit Percentage Percent Increase
September 30, Nine Months Ended September 30, /(Decrease)
2009 2008 2009 2008 2009 vs. 2008
(Dollars in thousands)
Gross Profit:
Rail Products $ 12,610 $ 27,194 9.0 % 15.7 % (53.6 ) %
Construction Products 24,304 35,257 18.9 20.8 (31.1 )
Tubular Products 1,999 6,819 13.0 25.9 (70.7 )
LIFO Credit (Expense) 6,675 (7,828 ) 2.4 (2.1 ) **
Other (1,316 ) (1,229 ) (0.5 ) (0.3 ) 7.1
Total Gross Profit $ 44,272 $ 60,213 15.6 % 16.3 % (26.5 ) %
Nine Months Ended Percent of Total Net Revenues Percent Increase
September 30, Nine Months Ended September 30, /(Decrease)
2009 2008 2009 2008 2009 vs. 2008
(Dollars in thousands)
Expenses:
Selling and
Administrative
Expenses $ 26,707 $ 29,417 9.4 % 8.0 % (9.2 ) %
Interest Expense 989 1,543 0.3 0.4 (35.9 )
Gain on Sale of DM&E
Investment - (2,022 ) - (0.5 ) **
Gain on Sale of
Houston, TX Property - (1,486 ) - (0.4 ) **
Gain on Sale of
Marketable Securities (1,194 ) - (0.4 ) - **
Interest Income (676 ) (2,018 ) (0.2 ) (0.5 ) (66.5 )
Other (Income)
Expense (445 ) 64 (0.2 ) - **
Total Expenses 25,381 25,498 8.9 6.9 (0.5 )
Income Before Income Taxes 18,891 34,715 6.7 9.4 (45.6 )
Income Tax Expense 7,076 12,626 2.5 3.4 (44.0 )
Net Income $ 11,815 $ 22,089 4.2 % 6.0 % (46.5 ) %
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Results of calculation are not meaningful for ** presentation purposes.
First Nine Months of 2009 Compared to First Nine Months of 2008 - Company Analysis
Net income for the first nine months of 2009 was $1.15 per diluted share which compares to net income for the first nine months of 2008 of $2.01 per diluted share. Included in net income of the current year is the pre-tax gain associated with the sale of our marketable securities ($1.2 million). Included in net income for the prior year period were pre-tax gains from the receipt of escrow proceeds related to the sale of our investment in the DM&E Railroad ($2.0 million) and the sale-leaseback of our Houston, TX facility ($1.5 million).
Due principally to declining steel prices, we have realized a positive LIFO adjustment for the full year 2009, while the prior year period included a negative adjustment caused by increased product prices. Gross profit was adversely affected in 2009 by the $2.7 million concrete tie warranty charge and $2.6 million of adjustments related to returned concrete ties which all occurred within our Rail Products segment. Low production volumes have increased unfavorable plant variances by approximately $3.5 million over the prior period. Gross profit was also negatively affected by slow-moving and obsolete inventory charges of approximately $1.0 million recorded primarily within our Rail Products and Tubular Products segments.
As we operate in the current recessionary economic environment, we continue to control our selling, administrative and manufacturing costs through various cost reduction measures. The primary reasons for reduced selling and administrative costs are reduced incentive compensation, travel and entertainment expenses and bad debt expense. Interest expense decreased from the prior year period due principally to reduced borrowings and, to a lesser extent, lower interest rates. Sharply reduced interest rates resulted in reduced interest income earned on our various cash instruments during the first nine months of 2009. The settlement of our foreign exchange contracts for gains contributed to increased other income over the prior year period. Income taxes in the 2009 year to date period were recorded at approximately 37.5%, as compared to the prior year period rate of 36.4% due to a reduced benefit from non-taxable interest income and certain domestic manufacturing credits.
Year-to-date Results of Operations - Segment Analysis
Rail Products
Nine Months Ended Percent
September 30, Increase/(Decrease) Increase/(Decrease)
2009 2008 2009 vs. 2008 2009 vs. 2008
(Dollars in thousands)
Net Sales $ 139,866 $ 172,680 $ (32,814 ) (19.0 ) %
Gross Profit $ 12,610 $ 27,194 $ (14,584 ) (53.6 ) %
Gross Profit Percentage 9.0 % 15.7 % (6.7 ) % (42.8 ) %
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First Nine Months of 2009 Compared to First Nine Months of 2008
Reduced industrial market demand within our rail distribution business drove the overall decrease in Rail Products sales for the first nine months of 2009 as compared to 2008. Depressed market conditions have reduced sales in our transit products division compared to its record sales year in 2008. However, this division has a strong backlog from recent activity which should begin to ship in 2010.
Current market conditions have led to overall lower demand and sales of concrete ties at all of our facilities. Our Grand Island, NE and Tucson, AZ facilities have been affected by low UPRR concrete tie purchasing levels throughout 2009. Also, our Grand Island, NE facility was negatively impacted by below-specification raw materials that led the Union Pacific Railroad (UPRR) to reject certain concrete ties which reduced sales by approximately $2.8 million.
Gross profit margin has declined across most of our divisions within our Rail Products segment. Two leading causes of our reduced gross profit relate to the following two specific issues at our concrete tie division. The first is the cumulative impact during 2009 of approximately $2.7 million in warranty charges related to in track failures of our prestressed concrete railroad ties. The second is the $2.6 million of gross profit charges associated with the rejection by the UPRR of concrete railroad ties which contained below-specification raw materials. The remainder of the divisions experienced margin contraction during 2009 associated, generally, with demand and pricing declines with the exception of our Allegheny Rail Products (ARP) division. The demand declines have resulted . . .
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